5 tips to get you there faster....
30 years is a long time for anything let alone a commitment to paying back a home loan, and for most this can seem very daunting. But don't let it scare you or control you.
Just remember a housing loan is a tool to help you buy a house. You are in control.
The first thing in making sure you don't let your home loan rule your life is to get your head around how to make the loan work for you - not the bank.
1: Schedule your repayment date to coincide with your pay date:
Normally the bank will set the repayment date to suite them, or it is based around the "settlement date" of when the loan first started - NOT a date that works for you.
Cal them today and change it to the day after your pay hits your account.
Depending on your pay office you can actually ask them to pay some of your wage direct into the home loan account. The account has a BASB & account number just like a normal account so your payroll person will not care. Just check with the bank first - this is called direct crediting or payroll crediting.
This takes the stress away each pay - if you pay your housing loan first you know it is done and you no longer have to think about it and stress about it each month...
If you can, pay extra each month, call the bank and have them take out a set amount. Even a small amount will start saving you money - for example 50 extra per month will save you 30,000 over the life of the loan.
2: Change your repayment frequency:
This coincides with the above, depending of course how often you get paid. If you are paid weekly or fortnightly make sure you change the loan repayments to match your pay cycle.
The theory is that there are more than 4 weeks in a month. - Technically the correct answer is to use 4.333333 when calculating weeks into months. Most people just use 4 as it is easier.
Let me break it down further for you. 12 months in a year means half month payments = 24 payments, but if you pay fortnightly.... How many fortnights in a year? - 26! - So really you get an extra month payment in every year.
But what does that look like? Assuming you have a home loan of $350,000 and a rate of 6% you will save 5 years 6 months and a Massive 86,842 in interest!
3: Make extra repayments
I know it seems obvious right? Just pay more you say?? That sounds simple, but most people don't. Are you aware of how little you need to do to make a massive difference? The key is consistency and to set up the extra repayments to be automatic, so
a) You don't think about it and
b) You won't even realize or miss the money.
Assuming the same 350,000 loan at 6%,
What's that 4 -5 cups of coffee a week?
50 per week extra will save you 101,098 & the loan will be paid off in less than 24 years.
Are you getting excited yet? It is so simple to save lots of money.
4: Lump sum payments
Yes, maybe you may win the lottery, but that is not what I am talking about.
But what about if you get a tax return every year. Or maybe you're a little bit odd like me and you hate coins. So, rather than spending them it I put it in my drawer (yeah I know real fancy!). This can amount to thousands quite easily over the space of a year.
Yeah, sure you could spend the coins or the tax return on stuff. But what would happen if ever you year you took a chunk of it and paid it off your home loan?
So let's assume that you are diligent and you use this money to make a one off lump sum at the end of the first year of 2000 home loan. Just one payment will save you 9,222 in interests!
Imagine if you can do that every year, or even every second year!
5: Setup an offset account
What is an offset account? This is generally a normal transaction account but it is linked to your home loan account. It's like your normal account you have now where your pay comes in and you can use Bpay or take money out at the ATM with a debit card etc. the only difference is that link to your home loan.
Because it is linked to your home loan, the balance of your transaction account gets offset against the balance of your home loan (effectively reducing the balance); hence the name offset.
So the more money you have in this account, the more you save on interest.
Think about it you have money in a savings account earning what 3-4% when you can offset your home loan hence saving 5-6%?
Let's say you have 3k in savings, just by putting that money in this account (again assuming a 350k loan @ 6%) you save 14,645 in interest!
How cool is that?
All you have done is moved your money from one account to another one! Think about the savings if you add to that every month, or if you have a bigger number
All it takes is little things. Take the time to set up these things and you will be saving MASSIVE amounts of interest and cutting years off your housing loan.
If you want some help to pay your home loan off sooner and want to get all of this automated you can drop me a line here.
Please remember that if your current loan does not have an offset you will need to change your loan product. So just a suggestion give me a yell and we can review the different lenders (aka banks) to make sure you are getting the best deal. Don't just trust the dude in the branch to have your best interests in mind.
By Anil Surma